The Pakistani rupee has been in a tailspin against the dollar, shedding value like a snake sheds it skin. The world’s leading currency has constantly hit new highs against the rupee.

This increase in the value of the dollar, or rather the erosion of the value of the rupee, has many factors but in the opinion of Zafar Paracha, the general secretary of Exchange Companies Association of Pakistan (ECAP), the primary reasons include smuggling of the US currency, uncertainty in the country and strict laws for exchange companies.

“Firstly, it has been seen that the smuggling of the dollar is on the rise, especially in Afghanistan and Iran,” he told Aaj News on September 9. The ECAP general secretary had joined the channel to speak about the fluctuating currency rate and its reasons.

The dollar has gained Rs12.4 against the rupee since September 1 despite Pakistan receiving over a $1 billion tranche from the International Monetary Fund. Many people were of the view that the inflow from the global lender would improve market sentiment and the greenback would fall by Rs10 to Rs15. But the August 1 development only led to a Rs2 decrease.

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“Secondly, the uncertainty in the country has led to the flight of capital and there is a demand of Hawala and Hundi,” Paracha said while speaking about the political situation. Hawala and Hundi are informal channels of money transfer that bypass traditional banking channels.

Thirdly, he said that the government has made strict laws for exchange companies and people for selling and buying dollars. “This means even our formal market might operate like a grey market and it has increased rapidly..”

The dollar was being traded at Rs240 in the grey market, Paracha added.

Previously, the interbank exchange rate was less than the open market. However, there was now a difference of Rs10-12 between the two markets. “This was never the case before.”

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The ECAP general secretary did not dispel the impression that some money changers might be involved in Hawala and Hundi. But he rejected the thought that some might be involved in sattay bazi (speculative trading of dollars) as the market is very small. Paracha blamed such ‘illegal chains’ of forex traders for the rupee’s massive depreciation.

He suggested that certain banks might have enaged in similar speculative trading. “The open market follows the inter-bank. We follow the trade. It’s like the government increases fuel rate and the petrol pumps act upon it.

“We [the state’s coffers] are empty. We don’t have dollar reserves. As soon as our reserves increase, the rate will decrease,” Paracha said.

He said Pakistan needs an influx of $40 billion this year. “If we receive $8 to $10 billion dollars, then the rate will come by Rs10 to Rs15 down. Then it should be around the Rs200 level.”

For the last 15 to 20 days, the exchange companies have not been providing dollars to the banks. He said they would be able to provide that when the rates of both markets are the same. Earlier, they used to give $25 million to $30 million on a daily basis for the inter-bank market.

He added that such a situation also impacts exchange companies, while expressing hope that inflows from other sources would improve the market.